Super system is all wrong: expert agency

So poorly are retirees served by the super system that Australia's leading longevity research organisation is suggesting the government step in and offer policies of its own through Australia Post.

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The Centre of Excellence in Population Ageing Research is the government’s preferred researcher on ageing and superannuation, funded by the Australian Research Council.

In a submission to the financial system inquiry to be published on Monday, the Centre says Australia is one of the few countries in the developed world to have outsourced its retirement income system to the private sector.

But it says the private sector funds either can’t or won’t bear the risk of working out how long their customers will live, so pass it back to them via inadequate products.

Instead of being offered a fortnightly payment for the rest of their lives most retirees are offered a lump sum or an amount which they can draw down over time. Without knowing how long the sum will last they are unable to plan and often outlive it and end up on the pension.

Many are encouraged to spend it or pour it into their houses in order to get the pension straight away.

“The most common reported use of lump sum spending is paying off home, home improvements and buying a new home,” said Centre director John Piggott. “When the lump-sum runs out, people revert to the pension system or try to re-enter the workforce.”

Professor Piggott said Australia’s finance industry was dominated by four large banks and one major wealth management group. They charge high prices and stifle competition. If a competitor gets successful they take it over.

Financial advisers find it more rewarding to continually advise on the management of lump sums than to suggest the alternative of buying longevity insurance.

Longevity insurance is a one-off purchase of the right to a guaranteed income until death. It is priced according to the risk of death, with the insurer rather than the customer bearing the risk of getting it wrong.

The submission recommends the creation of a new national agency to sweep away barriers to longevity insurance, overseeing the work of the Prudential Regulation Authority, the Securities and Investments Commission, the Department of Social Security and the Tax Office.

If needed the government could create the underlying financial instruments that would make the market work.

If the superannuation industry remained unenthusiastic the government itself could offer longevity insurance, selling guaranteed lifetime incomes through Centrelink or Australia Post in competition with the super funds.”

“It runs the risk of being forced to further subsidise retirement income if it doesn’t,” Professor Piggott said.

He also wants super funds to change the way they describe account balances. Instead of describing “amounts accumulated” their statements should describe expected “income streams” presented by age of retirement. Current regulations prevent the funds from forecasting income streams.

“Research suggests that presenting superannuation information in a ‘consumption’ frame is far more likely to move people in taking retirement benefit products with longevity protection features,” Professor Piggott said. “People have trouble converting lump sums to income streams as well as finding it difficult to work out how long they might live.”

The Centre’s submission echos that of the Treasury which said Australia's super system was one of the world’s most expensive and was more focused on amassing contributions than managing payouts.